Biotech Hangover from Earnings Clouds Outlook

• Healthcare sector (XLV) lagging technology (QQQ) and FAANG stocks.
• No earnings catalysts until Jan 2018 but Q4 has seen strong seasonality.
• Technicals rule as sellers predominate. Bull market is intact.

On October 16 we posted that Risks were Rising for the 2017 biotech rally primarily because technicals were weakening off the top and healthcare politics created a lot of uncertainty. Then we got hit with mixed earnings from several large cap biopharmaceutical companies taking them down 7- 10%  over the past month. The large cap weighted IBB is down about 8% over one month and off its October high of $342.50. Moreover the IBB is approaching its 200 day moving average at $309. We added the IBB  to our portfolio on 6/29/16 at a price of $250.

Our top rated Abbvie (ABBV) was up over 4% for the past month  and 51.3% YTD because of strong earnings with 8.8% revenue growth. Celgene (CELG) showed product line growth of 11% but the stock tanked 25% over the past month primarily because of lower revenue guidance of $19-20B for 2020 compared to previous forecast of $21B with slightly reduced EPS. Celgene has a deep and broad pipeline for cell-based therapies for leukemia, lymphoma and multiple myeloma but has been an overwhelming top pick for many analysts. This could account for the big price drop.

During the same rocky 30 day period high profile mid-caps were also weak but Alnylam (ALNY) was a winner up over 7% (until today hit by a public offering), but Incyte (INCY) was a loser down 6%. Keep the longer term trend in perspective because although the small cap weighted XBI is down over 6% for the month it is still up 37% YTD. Nektar Therapeutics (NKTR) soared 14% yesterday on upbeat data from their therapeutic cancer treatment NK-214 in a combination trial with Opdivo (Bristol-Myers Squibb) across several tumor types.

Many traders have shifted to smaller cap stocks where a bit of good news or even a rumor can boost a stock over 10 % in one day.

We remain cautious since mid-October and see no reason to overweight positions in our portfolio except we did add Celgene at a price point in the $102 range. Trading ETFs will not be easy with weak momentum and stock picking is the key to making money. We sold our XBI trading position near 87 but remain invested in several large and small cap biotech stocks. Drivers are the same for Q4: M&A and clinical news.

For a quick reference here is our Large Cap Biopharmaceutical metrics summary after 2016 earnings.